What should I do if I've been turned down for a mortgage?

Posted by  on Nov 04, 2014

Q: I'm a first-time home buyer -- or at least, I'd like to be. I just got turned down for a mortgage for the second time. What's my next move?

A: Your next move is to find out some specifics from the mortgage lenders you applied to previously (assuming you didn't apply twice to the same lender). Most likely, you got turned down for one of three reasons, and you can't do anything to address it until you know what the reason is:

  1. There is a problem with your credit history. If a lender tells you this is the roadblock, check out your credit report to make sure there are no mistakes. If there is a legitimate problem, try to address it by making good on delinquent payments or paying down existing debts.
  2. The loan you applied for is too big for your income. Lenders tend to use one-size-fits-all standards to determine whether your mortgage payments will fit into your budget. You could change that equation by paying off some existing debts to eliminate those payments; otherwise, this may be a signal that you should set your sights on a less expensive house.
  3. The loan-to-value (LTV) ratio was too high. You may be able to get within an acceptable LTV with a larger down payment. However, if the root of the problem is that the property is not worth as much as you are paying for it, you may be better off backing away from an overpriced deal.

The irony today is that mortgage rates are almost as cheap as they have ever been, but lenders are so cautious that relatively few people are qualifying for home loans. It's like seeing a beautiful piece of merchandise in the shop window, marked down on sale, except the store is closed. Finding out the specific reason your applications have been turned down is the first step toward finding the key that will unlock that store.

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